International Society of Primerus Law Firms

INCOTERMS 2020: Revision of an indispensable tool in international trade

Brödermann Jahn
Hamburg, Germany

On September 10 2019, the ICC published the INCOTERMS 2020 – the 9th edition of the international uniform trade terms that nowadays have become an indispensable part of the common usages in international trade. 3000 change requests leading to approx. 800 changes of the former text adapt the INCOTERMS once again to the constantly evolving practices in international trade. Their knowledge is essential for the internationally acting business lawyer.

Background

The law only provides for the basic rules of a sales contract, in particular regarding the delivery obligations. Now, these rules are often not suited for the particularities of international trade. Typically, for example, the goods are transported which triggers a need to define the transfer of risks; further customs duties must be fulfilled, taxes paid and many different documents handled (e.g. transport documents, consignment notes, certificates, etc.). Finally yet importantly, there is an increased awareness for security in trade since the beginning of the 3rd millennium.

INCOTERMS are trade clauses published in English by the International Chamber of Commerce (ICC), which provide standardized contractual provisions in order to cope with the aforementioned specific needs of international trade. They consist of a set of eleven 3-letter-codes (EXW, FCA, FAS, FOB, CPT, CFR, CIP, CIF, DAP, DPU and DDP), each backed by ten articles with individual obligations each for the seller and for the buyer. Starting with EXW (collectable debt) and ending with DDP (delivery debt), one can compare the above-mentioned order to a ladder of increasing delivery obligations for the Seller and decreasing obligations for the Buyer. Further some INCOTERMS (FAS, FOB, CFR and CIF) are only suited for maritime trade and are therefore in most cases unsuited for trade of containerized goods in particular.

The parties must unequivocally agree upon their specific INCOTERMS in their sales contract since they are not law. Practice recommends to individually agree on the applied INCOTERM to avoid difficulties from a battle of conflicting trade terms in the General Terms and Conditions.

Timing

After some secrecy, the ICC published the new text of the INCOTERMS 2020 on September 10, 2019. They come into force on January 1, 2020. Nonetheless, being contract terms, the parties can agree the new set of rules (and on any other previous version) at any time; the entry into force is only important if the parties have omitted designating the version of the INCOTERMS they intend to use.

What’s new and what’s not?

Most changes are of an editorial nature. The authors of the INCOTERMS intended making their handling easier for users in their business. In particular, the introduction chapter has improved with outstandingly useful instructions for the proper use of the INCOTERMS. The practitioner should carefully read and observe these instructions. Further, the order of the INCOTERMS as well as of the individual articles within a term were changed.  All this is intended helping to find the right term for the intended trade.

1. No deletion of EXW and DDP

Despite some speculation in advance, the ICC did not remove the two extreme poles of the delivery obligations EXW and DDP. The user can still use EXW and DDP but should be aware of their shortcomings:

When using EXW, the export clearance is within the buyer’s scope of obligations and under DDP, import clearance is within the seller’s scope of duties. This can lead to problems when the customs law prescribes that the declarant shall have his place of business in the respective country of export or import. Further, under EXW the seller may have trouble getting exemption from turnover tax for export deliveries. Finally, under EXW the buyer has to organise the transport including loading the goods at the seller’s premises. When the seller undertakes the loading against EXW’s contractual arrangement, both parties risk problems with their insurances when something goes wrong during loading.

2. “Checklist” for costs affected by INCOTERMS

The authors of the INCOTEMS 2020 have concentrated all costs caused by an INCOTERM in one article (A9/B9). All omissions in this respect may have a direct negative impact on the trader’s margin. Therefore, this article is a most useful overview to check whether the calculation of a deal covers the cost structure implemented by the selected INCOTERM.

3. Bill of lading with an on-board-notation

FCA now provides for an obligation of the buyer to hand over to the seller a transport document stating that the goods have been loaded (such as a bill of landing with an onboard notation). ICC has introduced this clause because the use of “FOB” in trade of containerized goods is widespread but nonetheless often unsuited since containers are not placed on board of a ship by the seller but by the operator of the port’s container terminal. However, banks often require a bill of lading from the seller when they finance a sale by letter of credit. Now, as the seller himself has no contact with the shipper he will not get a bill of lading when he completes his delivery obligation at the container terminal. The new obligation intends to close this gap. Critics point out, however, that it is doubtful whether a mere obligation of the buyer to surrender the bill of lading really solves the problem.

4. Revised obligations relating to transport insurance in CIP/CIF

Under CIP (multimodal transport) and CIF (maritime clause) the seller organizes transport and transport insurance to the named place or port of destination according to standard clauses provided by London based Lloyd’s Market Association or International Underwriting Association (or similar clauses). Until the 2010 edition, both in CIP and in CIF the seller was only obliged contracting minimum transport insurance coverage according to clause (C) LMA/IUA, unless agreed otherwise. Since INCOTERMS 2020, the seller must contract all risks coverage according to LMA/IUA clause (A) for CIP while he can remain with clause (C) under a CIF term.

5. DAT becomes DPU

The 2010 DAT term (Delivery at Terminal) was renamed DPU (Delivered at Place unloaded). ICC wants to counter widespread misunderstandings regarding the meaning of the word “Terminal”. In fact, the only difference between DPU and its sibling DAP is that while under DAP the seller must place the goods at the disposal of the buyer on the arriving means of transport ready for unloading at the agreed point, he must additionally unload the goods under DPU. This is now clarified.

6. Strengthening safety in international trade

Further, the 2020 edition of the INCOTERMs emphasizes transport-related and goods-related safety aspects of international trade. Since around twenty years, safety issues in transport – like for instance the Known Consignor scheme in air transport – have become a much more prominent aspect. Further, since the attacks of 9/11 goods related safety issues have become the subject matter of important regulations in international trade. Both issues are now addressed in the INCOTERMS, which regulate who shall organize and bear the costs of the respective duties.

Conclusion

The INCOTERMS are an indispensable set of delivery terms in international trade. They are well balanced and provide precious guidelines for making good sales contracts and for resolving disputes among traders. For further inquiries, please contact Christoph.Oertel@german-law.com.


The general information contained herein is intended for informational purposes only. It is not intended to be, and should not be construed as, legal advice or legal opinion on any specific facts or circumstances.

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